Rewriting the Money Narrative
Choosing stability over system health
Hi friends 👋,
As 2021 comes to a close, I can’t help but think of where I was exactly one year ago: on vacation furiously reading about Bitcoin and Ethereum. That’s right, I am NOT one of Bitcoin’s early HODLers. In early 2021 I could barely tell you the difference between Ethereum and Ethereum Classic. The horror…
Part of the challenge in learning about cryptocurrencies, and ultimately Web3, is that everything is so damn multi-disciplinary! To understand Bitcoin you need to understand blockchain, which requires a combination of both computer science and game theory. More broadly, to understand cryptocurrencies you might need to understand macroeconomics and monetary policy. Needless to say, these are tall orders that don’t exactly scream “fun weekend activity!”.
That’s why I want to dedicate this article to one of my earliest self-inquiries on my Web3 journey, that being the nature of money. Though not a complete guide, I had fun arriving at a cheekily non-specific solution for all our currency devaluation woes (I’m only slightly kidding). Hope you enjoy!
Let’s get to it 🚀
Rewriting the Money Narrative
One of the most common memes proliferated by cryptocurrencies is the idea that money is, in fact, a narrative. Yes, the paper bills that you hold in your wallet are inherently worthless - except for society’s shared belief in their value. But any homo erectus who’s read Yuval Harrari’s Sapiens could tell you this much.
The whole ‘money is a narrative’ bit serves a greater purpose than raising an intrigued eyebrow during dinner-time chit chat. It’s true calling is more akin to monetary-red-pill; jolting daydreamers awake to a recognition of money’s ephemeral form but persistent function.
In other words, ‘money’ as an idea endures, but is embodied uniquely throughout distinct phases of human progress. From seashells and precious metal coins to our current sovereign currencies, money isn’t going anywhere. It’s one of our stickiest and most robust narratives, managing to ride out every one of our crack-pot accounting ideas and maniacal obsessions (eg. tulips). Though changing in form, money has retained its singular purpose.
Money acts as a layer of abstraction for all goods, services, and aspects of life. It is a universal framework for quantifying relative value and opportunity cost, allowing us to transact seamlessly without worrying about the unit-to-unit exchange of goods (eg. how many apples is my iPhone worth?). Without this accounting abstraction there can be no ‘economy’ as we know it. We would be woefully stuck in the barter system. In this sense, money is a mechanism for human collaboration, granting us the detachment needed to pursue a generalized representation of value rather than hunt and gather for every one of our specific needs.
In this sense, money is also an incentive system; a single-minded system of points that becomes society’s lens for improving one’s stature in life. We call this the profit motive, the baseline assumption in modern economic theory that we all want ‘money points’. It’s easy for this to sound like a brutal free-for-all, but surprisingly we’ve managed to create a set of rules so that point-gathering benefits the individual and the collective. Capitalism, for instance, offers a path for value gain that encourages us to ‘grow the pie’, often by creating technology or innovating to increase the pool of prosperity and wealth in the world (though all systems are imperfect and often abused!). It’s really the interplay between money’s subplots that make it an effective ideology for human progress - its both an incentive and collaboration system.
“Our use of money has taken us pretty far,” you might ask, “So why stop now?”. Well, the risk isn’t so much that we stop, but that we stumble. We are always staving off some force of entropy that threatens to take the wheels off the bus. Today it’s excessive currency devaluation, 500 years ago it was losing your gold to the bottom of the Pacific. All this to say that our money systems are imperfect, and we haven’t yet found a stable embodiment of money. Especially one that can’t be destabilized by misaligned behaviour of a single agent abusing incentive systems (eg. any financial crisis). For this reason, I want to talk today about the future of the money narrative, namely, where it’s been and where it’s going:
Problems with money as we know it
Embracing humility and money networks
Problems with money as we know it
First, I want to provide evidence for my claim that we haven’t yet ‘solved’ the money problem. By this I mean that we haven’t found an embodiment of money that is stable in the long-term. This is well evidenced by a quick review of money’s various ‘prototypes’. In his article, Your Money and Your Life, Edward Snowden explores the deep history of monetary dilution.
Hitting fast forwarding on the beads and the seashell phase, Snowden portrays a bustling market in ancient Rome: Buyers travel between stalls that are inhabited by merchants with using ‘dishonest scales’, their purses jingling and jangling with disfigured silver coins. These unbecoming grooves and scratches were inflicted by the coin’s long history of owners, each deformation a clever attempt by Roman citizens to inflate their own wealth by saving up scraps of precious metal. An ironic form of consumer-driven money printing indeed.
Over time, the currency needs of the Roman state grew - as a result of too many far-off wars, so Rome decided to dilute the true quantity of silver in the Roman Denarius. Silver, after all, is naturally scarce, and so mining it was seen as a limiting factor in the equation for human prosperity. Silver dilution proved an unreasonably effective method for multiplying Rome’s coffers, so much so, that over the span of two centuries, the amount of actual silver in Rome’s silver coin became negligible.
Leaping forward a few centuries, the state of money entered its next phase of embodiment; the so-called ‘promissory note’. A piece of paper redeemable for a commodity of your choice! Such financial innovation was welcome bliss to the hunched backs and heavy coin purses of early merchants. This nascent form of fractional-reserve banking meant that a bank only needed to hold enough precious metal to satisfy the expected withdrawals of their customers - with a generous margin of safety of course.
And so the dissonance between actual and representational money grew even wider. So much so that humanity began to experience brief blips in the illusion of the money narrative. They began to encounter what’s known as a ‘run on the bank’; a moment when all a bank’s customers rush to redeem the asset backing their bills, only to discover that their paper is in fact only an ‘I.O.U.’. Such events are holes poked in the narrative of money, wears and tears that only grow larger and more frequent over time.
It would appear that the history of money is really a history of jumping ship from one leaky boat to the next. 50 years ago we left the idea of promissory notes behind, and moved on to our current liferaft: the sovereign currency. We tied the value of our money to the most stable entities in our lives: nations and governments, which is why our dollars are no longer backed by precious metals, but instead are kept in a state of relative valuation maintained by foreign trade and GDP growth.
So I ask you, have we solved the money problem? Likely not. We merely suffer from collective memory loss as we churn through human lives. It’s only when the current money system begins to take on water that we arm ourselves with a brief review of history and remember the urgency of building our next life raft in time.
Embracing humility and money networks
If you know me and my writing, you know this is going to be about cryptocurrencies. Now this won’t be about Bitcoin or Ethereum, but instead will be about embracing the technology of cryptocurrencies as the next embodiment of money. I’m of the mind that we’ll never devise a perfect monetary system. Every incarnation is forced to make tradeoffs that predispose it towards certain properties: Yes, Bitcoin can’t be inflated, but it will overwhelmingly accrue value for early adopters (a rather unfair trait for the last billion people to hold it). Over the last 50 years, it would’ve been wise to store your wealth in USD, but today America’s reserve currency status is being challenged. Even categorically, the devaluation of fiat today represents a species-wide problem. All money systems will rise and fall, and believing too strongly in any one can only leave us clinging to the flotsam of financial wreckage. We need to play a different kind of game.
The best monetary system will be one that maintains our ability to progress as a species by avoiding system-wide fallouts. We cannot lean too greatly on any one system, less we poke too many holes and it all comes crashing down. In recognition of this, I posit that what we need to do is diversify.
Diversification admits that no single system will remain the de facto form of money. It views the problem of monetary stability as a load balancing problem rather than one of policy. Instead of “What is the perfect money system”, we ask “How can we distribute the ‘money load’ across different money systems to achieve long-term stability?”. Now this… this is a problem we can solve.
So why do I say cryptocurrencies should be the next embodiment of money? Well, it’s because they have highly desirable properties for enabling this future of ‘monetary load balancing’. For one, cryptocurrencies are naturally compatible across different money systems. Bitcoin, Ethereum, Solana, Avalanche… these are all blockchains with unique technical specs, monetary policies, and native currencies. In spite of this, they can each be unified into a meta-network of money by using code that allows them to interoperate. Interoperability allows them to act as a network of money systems.
I believe that all current and future money systems will join this network, that everything will be tokenized. We already have tokens that track the real-time price of USD, gold, social clout, and carbon credits, but that’s only getting our feet wet. In the future, all aspects of our economy will be brought on-chain, and code will be used to unify our financial world into a holistic, digitally accessible experience.
If this seems far-fetched and pie-in-the-sky, perhaps that’s because it is! A consequence of knowing that money is a narrative is that it returns to us the power of choice. We can choose how our money systems evolves, and in doing so, influence the form of one of humanity’s greatest narratives.
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With gratitude, ✌️